NOBLE SPIRIT LTD t/a LIFE SOLUTIONS v. WONG SHU YUEN also known as GARRY WONG AND ANOTHER

HCA 842/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 842 OF 2011

IN THE ORIGINAL ACTION

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D E C I S I O N

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Background

1.  This is an application taken out by the 4^th defendant (by counterclaim), Mr Lee Siu Hung (“Lee”), by way of the summons dated 7 December 2012 to strike out the action made against him by the plaintiff (by counterclaim), Mind Body (Asia) Limited (“Mind Body”).

2.  The ground of the application is that the High Court has no jurisdiction to hear or determine Mind Body’s counterclaim against Lee or any part thereof, as it is within the exclusive jurisdiction of the Labour Tribunal by virtue of section 7 of the Labour Tribunal Ordinance (“LTO”) and the Schedule thereto.

3.  There is no dispute that Lee was employed as a technician by Mind Body from 19 January 2006 to 15 April 2011 and that Lee had signed an employment contract in April 2006 with Mind Body (“the Employment Contract”).

4.  According to Mind Body’s pleaded case in the Amended Defence of the 1^st and 2^nd defendants and Amended Counterclaim of the 2^nd defendant dated 21 August 2012 (“the Counterclaim”), Lee resigned from Mind Body on 15 April 2011 and is now working for the 1^st defendant (by counterclaim), Noble Spirit Limited trading as Life Solutions (“Life Solutions”).

5.  Mind Body alleges that Lee’s act in working for Life Solutions was in breach of the restraint of trade clause (ie clause 12) in the Employment Contract, by which Lee agreed not to engage himself in any work in the same trade or industry as Mind Body in Hong Kong within 6 months after termination of his employment with Mind Body.

6.  Mind Body also alleges that Lee acted in breach of the Employment Contract and duties owed to Mind Body, the particulars of which are stated in paragraph 36(i) of the Counterclaim as follows:-

“Breach of implied terms of the employment contract and breach of duties as stated in Paragraph 13(ii) and 14 hereinabove;”

7.  Paragraph 13(ii) of the Counterclaim states that the express terms and conditions of the Employment Contract (in clause 12) were that Lee agreed not to disclose or divulge any internal information of Mind Body obtained in his course of employment with Mind Body including data of contracts, customers, commercial and other information relating to operations to competitors, business entities in the same trade or industry, media or any other persons; and all such information of Mind Body shall be returned to Mind Body upon termination of his employment with Mind Body.

8.  Paragraph 14 of the Counterclaim, on the other hand, states that the following terms were implied in the Employment Contract, in that Lee owed to Mind Body the following duties:-

(i)     A duty of loyalty and fidelity;

(ii)    A duty to act in good faith;

(iii)   A duty to act at all times in the best interests of Mind body; and

(iv)   A duty not to put himself in a position of conflict of interest with Mind Body.

9.  Apart from saying that Lee was extensively and intensively trained by Mind Body in the technical know-hows of installation and maintenance of new water purification systems, products and/or equipments sold by Mind Body since his employment with Mind Body and he is now working for Life Solutions, which is in breach of the restraint of trade clause, there are no particulars pleaded as to how Lee was in breach of the aforesaid implied terms or duties.  It is not even pleaded that Lee has disclosed or divulged any internal information of Mind Body to Life Solutions or any other third parties.  Nevertheless, Mind Body seeks the following reliefs against Lee:-

(i)     Damages for breach of employment contract;

(ii)    Damages for breach of duties as an employee;

(iii)   Injunction to restrain Lee from engaging in any work in the same trade or industry as Mind Body in Hong Kong within 6 months after termination of his employment with Mind Body;

(iv)   Damages in lieu of the injunction;

(v)    Interests on any damages awarded and payments resulting from account of profits;

(vi)    Such further and/or other relief; and

(vii)    Costs.

10.  Mind Body’s claims against Lee for breach of the restraint of trade clause and for disclosing or divulging any internal information of Mind Body to a third party (assuming this is the case) in reliance of an express term of the Employment Contract (ie clause 12) are clearly contractual claims.  Apart from that, it is not clear what kind of duties Mind Body is alleging that Lee owes to it.  From the wordings in paragraph 14 of the Counterclaim, it seems that the duties therein mentioned were just implied terms of the Employment Contract.  However, Mr Shum, counsel for Mind Body, submits that these duties were fiduciary duties (even though the word “fiduciary” was not used to describe the duties), and if the pleading is not clear on this, he is prepared to apply for an amendment to clarify the same.

11.  Mr Shum also confirms that Mind Body is not making any claim against Lee based on breach of confidence or conspiracy to injure, and will not rely on the contention that Lee has waived his rights to raise any dispute on jurisdiction by taking active steps in the present proceedings.

12.  Thus, it is now clear that Mind Body’s claims against Lee is based on only two causes of action, namely (i) breach of express and/or implied terms of the Employment Contract and (ii) breach of fiduciary duties.  It cannot be disputed that the first cause of action is purely contractual in nature, but the parties hold different views on whether a claim based on breach of fiduciary duties is founded in tort or not.  This is the main dispute concerning the present application.

13.  Section 7(1) of the LTO stipulates that the Labour Tribunal shall have jurisdiction to inquire into, hear and determine the claims specified in the Schedule; and section 7(2) of the LTO stipulates that no claim within the jurisdiction of the Labour Tribunal shall be actionable in any court in Hong Kong save as is provided in the LTO.  The claims stated in paragraph 1 of the Schedule to the LTO include, inter alia, a claim for a sum of money which arises from the breach of a term, whether express or implied, of a contract of employment.  If Mind Body’s claims are caught by these provisions, the Labour Tribunal shall have exclusive jurisdiction over the claims.

14.  However, paragraph 3 of the Schedule to the LTO stipulates that “Notwithstanding paragraphs 1 and 2, the tribunal shall not have jurisdiction to hear and determine a claim for a sum of money, or otherwise in respect of a cause of action, founded in tort whether arising from a breach of contract or a breach of a duty imposed by a rule of common law or by any enactment.”  If, as submitted by Mr Shum, Mind Body’s claims based on breach of fiduciary duties are founded in tort and fall within the ambit of paragraph 3 of the Schedule, then such claims can remain in the High Court.

15.  Ms Lau, counsel for Lee, submits that Mind Body’s claims against Lee, as pleaded, are all based on the alleged breach of the restraint of trade clause and implied terms of the Employment Contract, and there is no plea against Lee of any cause of action founded in tort.  She also opposes to any proposed amendment of the pleading to include breach of fiduciary duties.  However, even if breach of fiduciary duties is included in the claims, such cause of action is not founded in tort.

Whether breach of fiduciary duties is a cause of action founded in tort

16.  Having considered the submissions and authorities submitted by both parties, I am of the view that breach of fiduciary duties is not a cause of action founded in tort.  The leading English case on fiduciary duties in the context of employment is University of Nottingham v Fishel and another [2000] ICR 1462, where Elias J said this:-

“By contrast, the essence of the employment relationship is not typically fiduciary at all. Its purpose is not to place the employee in a position where he is obliged to pursue his employer’s interests at the expense of his own. The relationship is a contractual one and the powers imposed on the employee are conferred by the employer himself. The employee’s freedom of action is regulated by the contract, the scope of his powers is determined by the terms (express or implied) of the contract, and as a consequence the employer can exercise (or at least he can place himself in a position where he has the opportunity to exercise) considerable control over the employee’s decision making powers. This is not to say that fiduciary duties cannot arise out of the employment relationship itself. But they arise not as a result of the mere fact that there is an employment relationship. Rather they result from the fact that within a particular contractual relationship there are specific contractual obligations which the employee has undertaken which have placed him in a situation where equity imposes these rigorous duties in addition to the contractual obligations. Where this occurs, the scope of the fiduciary obligations both arises out of, and is circumscribed by, the contractual terms; it is circumscribed because equity cannot alter the terms of the contract validly undertaken.” (underlines added)

17.  The passage quoted above clearly shows that fiduciary duties in the context of employment are founded in equity, and the scope of which arises out of and is circumscribed by the contractual terms.  The above case was approved by the English Court of Appeal in Helmet Integrated Systems Ltd v Tunnard [2007] FSR 16.

18.  The authorities in Hong Kong also show that breach of fiduciary duties in the context of employment is not a cause of action founded in tort.  In Citipost (Asia) Limited v Julian Robert Holliday, CACV 111/2004, the plaintiff’s claims against the defendant included those based on breach of fiduciary duties.  After analysing the plaintiff’s claims, the judge below came to the conclusion that the only matter which was outside the exclusive jurisdiction of the Labour Tribunal was the injunctive relief claimed by the plaintiff.  On appeal, the Court of Appeal found that the judge below was correct.

19.  In Glock (HK) Ltd v Brauner [2007] 2 HKLRD 852, the appellant argued before the master that the respondent’s claim for damages resulted from a breach of fiduciary duty and therefore came within the exception in paragraph 3 of the Schedule to the LTO as an action founded in tort.  However, on appeal, the appellant’s counsel accepted that the claim for damages for a breach of a fiduciary duty is not founded in tort but in contract and equity.  Although the appellant’s counsel further argued that by reason of paragraph 3 of the Schedule to the LTO, the Labour Tribunal does not have jurisdiction where the remedies are in equity, such contention was rejected by Saw J.  It was held that paragraph 3 of the Schedule to the LTO clearly excludes only one cause of action from the jurisdiction of the Labour Tribunal, namely one founded in tort.

20.  In Deutsche Bank AG (Hong Kong Branch) v Daniel Mamadou-Blanco [2012] 3 HKC 176, Deputy Judge Lok, referring to Citipost and Glock, held as follows:-

“Provided that the claimant is not claiming for non-monetary relief, Citipost (Asia)v Julian Robert Holliday, unreported, CACV No 111 of 2004 (decision of the Court of Appeal on 8 February 2005) is the clear authority for the proposition that a claim by the employer against employee or former employee for loss and damages arising from breach of an express or implied term of the contract of employment or breach of fiduciary duties is one falling within the exclusive jurisdiction of the Labour Tribunal (see also: Glock (HK) Ltd v Brauner [2007] 4 HKC 186).” (underline added)

21.  However, Mr Shum submits that breach of fiduciary duties is tortious in nature, as it was held by Sakhrani J in Gain Hill (Hong Kong) Ltd v Li Kin Yip & Another [2006] 4 HKLRD 186 that breach of the duties of good faith and fidelity are tortious in nature, and such duties of good faith and fidelity arise from a general fiduciary duty and are limbs to that general duty.  However, I do not find that Mr Shum’s submission is in accordance with Sakhrani J’s judgment in Gain Hill.  In that case, the plaintiff relied not only on breach of the duties of good faith and fidelity, but also breach of the obligation of confidentiality.  Sakhrani J did not hold that a claim for breach of the duties of good faith and fidelity is tortious in nature.  He just held that the claim for breach of confidence is founded both in contract and in tort.  I cannot see how Sakhrani J’s judgment in respect of breach of confidence can be extended to breach of the duties of good faith and fidelity or breach of fiduciary duties in general.  In any event, Sakhrani J did not elaborate on the rationale of why breach of confidence is founded in contract and in tort.  It is difficult to make comparison and draw the conclusion that breach of fiduciary duties is also founded in tort.

22.  Mr Shum also submits that in AXA China Region Insurance Co Ltd v Lin Kwai Ying Katie [2012] 2 HKLRD 1139, the claim of “breach of fiduciary duties” was held to be falling within and being part of the cause of action of “loss of unlawful means”, and it was treated as a tort by Chung J.  Nevertheless, that case was not dealing with a claim of “breach of fiduciary duties”.  The cause of action in that case was “the tort of causing loss by unlawful means (the unlawful means here being the breach of the non-solicitation obligation and the breach of fiduciary duties)”.  Causing loss is clearly a tort, but it does not mean that the “unlawful means” must also be a tort.  The breach of fiduciary duties referred to in that case is just part of the “unlawful means”, but there is nothing in that case suggesting that breach of fiduciary duties is tortious by itself.

23.  By citing some of the passages in Clerk & Lindsell on Torts, 20^th ed, Mr Shum contends that breach of confidence, breach of fiduciary duties and causing loss by unlawful means qualify the test as tort since they all arise from a legal duty (such as fiduciary duty and duty of confidence) which affects the interests of an individual to a degree to allow that individual to sue on his own account, and that the merging of common law and equity after the Judicature Act 1873 renders these causes of action part of (or alongside) torts.

24.  This contention is not supported by the cases as aforesaid.  The learned authors of Clerk & Lindsell do not support such a contention either.  In paragraph 1-06 of the book, the authors state that:-

“The equitable wrongs of breach of fiduciary duty and breach of confidence are analogous to torts but differ in that their historical roots lie in the Court of Chancery rather than the common law courts.  The main remedy for these wrongs is that of “equitable compensation” which seeks to put the claimant in as good a position as if no wrong had occurred.  As Burrows has noted, the case law has been moving in the direction of removing distinctions between this remedy and compensatory damages for tort.  Birks has suggested that equitable wrongs should be considered alongside torts and although, strictly speaking, they cannot be regarded as torts, this edition includes sections on both breach of fiduciary duty and breach of confidence.” (underlines added)

25.  From the above passage, it is clear that breach of fiduciary duty and breach of confidence are only “analogous” to torts, but they “cannot be regarded as torts”.  When the case law has been moving in the direction of removing the distinctions between “equitable compensation” and “compensatory damages for tort”, it only means that the main remedy for these equitable wrongs are becoming similar to the remedy for torts.  It does not mean that the causes of action founded in equity are changing to those under torts.  In paragraph 10-22 of the book, the authors also state that “Quite apart from liability in contract and tort, a professional may also owe concurrent fiduciary duties to his client in equity”.  It is clear that the authors are not advocating that there is no more distinction between the different causes of action, but just that breach of fiduciary duties is a concurrent cause of action founded in equity.

26.  Thus, I do not find it correct to contend that breach of fiduciary duties is a cause of action founded in tort.  Even if Mind Body is going to amend the Counterclaim to include or spell out a claim for breach of fiduciary duties, it will not bring its case any further.  It is therefore not necessary for me to give Mind Body an opportunity to amend the Counterclaim.

Paragraph 3 of the Schedule to the LTO

27.  Mr Shum submits that there are 3 classes of cases in paragraph 3 of the Schedule to the LTO where the “tort” will exclude the jurisdiction of the Labour Tribunal, namely: (1) Tort arising from a breach of contract; (2) Tort arising from a breach of duty imposed by a rule of common law; and (3) Tort arising from a breach of duty imposed by any enactment, and that the present case falls within classes (1) and (2) as it arose from a breach of an employment contract and from a breach of duty imposed by law.  The phrase “common law” in paragraph 3 of the Schedule, as suggested by Mr Shum, must be a generic term used to describe both the common law and equity by virtue of section 16 of the High Court Ordinance.

28.  However, the crucial element of the exclusion under paragraph 3 of the Schedule is that it has to be a cause of action “founded in tort”, and as aforesaid, breach of fiduciary duties is not a cause of action founded in tort, it does not matter whether the present case arose from a breach of an employment contract or arose from a breach of duty imposed by law (either common law or equity).

29.  Referring to China Region Insurance Co Ltd v Lin Kwai Ying Katie, supra, Advanced MP Technology HK Limited v Su Yan Wen Lisa, HCA 1252/2007 and Advanced MP Technology HK Limited v Ma Tsz Lung, HCA 1288/2007, Mr Shum also submits that given the nature and complexity of the causes of action like breach of confidence and breach of fiduciary duties, the fact that their historical origin is from equity and the remedies are equitable provides all the more reason for them to be excluded from the jurisdiction of the Labour Tribunal under paragraph 3 of the Schedule.

30.  I agree that the Labour Tribunal may not be the best venue for dealing with complicated cases involving breach of fiduciary duties.  However, the Labour Tribunal is empowered by section 10 of the LTO to decline jurisdiction and transfer such cases to the Court of First Instance or the District Court. Thus, the mere fact that such cases involving breach of fiduciary duties are complicated should not be a ground to suggest that such cases are excluded from the jurisdiction of the Labour Tribunal all together.  One must still look at the wordings of the LTO to see whether the Labour Tribunal has jurisdiction over this type of cases or not.  As it is clear that paragraph 3 of the Schedule only excludes causes of action founded in tort, and breach of fiduciary duty is not founded in tort, such a cause of action is not excluded from the jurisdiction of the Labour Tribunal.

31.  Thus, I am of the view that paragraph 3 of the Schedule to the LTO is not applicable to Mind Body’s case.

Paragraph 1 of the Schedule to the LTO

32.  Even though Mind Body cannot rely on paragraph 3 of the Schedule, Lee is still required to show that Mind Body’s claims fall within paragraph 1 of the Schedule to the LTO in order to be able to strike out Mind Body’s action.  For Lee’s purpose, the claims have to be within the category of “A claim for a sum of money which arises from … the breach of a term, whether express or implied … of a contract of employment” as stipulated in paragraph 1 of the Schedule.

33.  The parties have no dispute that the phrase “A claim for a sum of money” stipulated in paragraph 1 of the Schedule is not restricted to a liquidated claim, but includes a claim for unliquidated damages.  This point was settled by the Court of Appeal in Citipost (Asia) Limited v Julian Robert Holliday, supra.  Thus, even though Mind Body is not claiming for a specific sum or sums of money, such claims for unliquidated damages can be caught by paragraph 1 of the Schedule.

34.  There is also no dispute that Mind Body’s claims arise from the breach of an express term (clause 12) of the Employment Contract and the implied terms as stipulated in paragraph 14 of the Counterclaim.  As to the claim for breach of fiduciary duties, it is clear that such a claim also arises from the breach of the implied terms of the Employment Contract as pleaded in paragraph 14 of the Counterclaim, although the cause of action is founded in equity as aforesaid.

35.  Thus, Mind Body’s claims for “Damages for breach of employment contract” and “Damages for breach of duties as an employee” are within the ambit of paragraph 1 of the Schedule.

36.  However, Mind Body’s claim for an injunction to restrain Lee from engaging in any work in the same trade or industry as Mind Body is not “A claim for a sum of money” and hence not within the jurisdiction of the Labour Tribunal.

37.  The parties agree that if part of Mind Body’s claims is not within the jurisdiction of the Labour Tribunal, all the claims can remain in the High Court.  The parties’ agreement on this follows the decision of Deputy Judge Lok in Deutsche Bank AG (Hong Kong Branch) v Daniel Mamadou-Blanco, supra, where he held that ‘a claim for a sum of money’ in paragraphs 1 and 3 of the Schedule to the LTO is not the same as ‘a cause of action’, and as the plaintiff’s damages for breach of confidence would, in substance, be more or less the same as the damages for breach of fiduciary duties caused by the alleged act of the defendant in encouraging his colleagues to leave the plaintiff, it is actually one single claim of the plaintiff ‘for a sum of money’ which is based on two separate causes of action.  Thus, even though Deputy Judge Lok held that breach of fiduciary duties is within the jurisdiction of the Labour Tribunal, when breach of confidence is not, the entire claim of the plaintiff falls within the jurisdiction of the Court of First Instance.

38.  Thus, by the same token, if Mind Body has a valid claim for injunction against Lee, the entire claim of Mind Body can remain in the High Court. However, Ms Lau submits that the injunction sought by Mind Body is only for 6 months after the termination of Lee’s employment with Mind Body and since Lee’s employment with Mind Body ceased on 15 April 2011, the period of 6 months has long past, and hence whether the injunction should be granted is now an academic question.

39.  In Deutsche Bank AG (Hong Kong Branch) v Daniel Mamadou-Blanco, supra, Deputy Judge Lok held that:-

“In order to avoid abuses, the court would examine whether a claim for non-monetary relief is ‘window dressing’. If the answer is in the affirmative, the court would disregard the claim for non-monetary relief and hold that the claim is one simply for ‘a sum of money’ thereby falling within the exclusive jurisdiction of the Labour Tribunal (see: Gain Hill (Hong Kong) Ltd v Li Lin Yip, supra,and Ngan Yu Chiu v New World First Bus Services Ltd, unreported, DCCJ No 824 of 2009, [2010] HKCU 836).”

40.  The Court of Appeal in Citipost (Asia) Limited v Julian Robert Holliday, supra, also held that:-

“Indeed, nearly a year has passed since the judge heard the matter and it can now be said that the injunction claim, limited as it is to the Restrictive Covenant in the contract of employment, is now a matter of history. The periods of the Restrictive Covenant have now expired save for clause 7 which prohibits the divulgence of confidential information.”

41.  Having examined Mind Body’s case, I agree with Ms Lau that Mind Body’s claim for an injunction against Lee is merely “window dressing”.  The present action was started by Life Solutions on 18 May 2011, but Mind Body only filed the Counterclaim on 5 July 2011.  Mind Body did not take out any application for interlocutory injunction to restrain Lee from working for Life Solutions. If Mind Body was so concerned that Lee should not be working for Life Solutions, I see no reason why it did not apply for an interlocutory injunction.  On the other hand, Mind Body should know that the 6 month period would expire in October 2011 and it must be unlikely that the trial could be held before the expiry of the 6 month period.  Thus, it would serve no real purpose to apply for an injunction in the Counterclaim.  It is clear that the injunctive relief sought by Mind Body is now a matter of history as in Citipost. Mind Body can only claim for damages in lieu of injunction.  In the circumstances, Mind Body’s real claim should just be for damages, and the claim for injunction should not take Mind Body’s claims outside the jurisdiction of the Labour Tribunal.

42.  The claim for “interests on any damages awarded” is just related to the claims for damages and is also a claim for a sum of money.  As to the claim for “payments resulting from account of profits” (or “interest on payments resulting from account of profits”), it is not clear why Mind Body is making such a claim against Lee together with the other 3 defendants (by counterclaim), as there was no claim for account of profits against Lee at all.  It could just be a mistake in the way the Counterclaim is pleaded.  In any event, Mr Shum did not refer to this claim at all.  So it is not a claim that Mind Body would rely on.

Conclusion

43.  I am therefore of the view that all the claims made by Mind Body against Lee are within the exclusive jurisdiction of the Labour Tribunal, and hence Mind Body’s action against Lee should be struck out from the present proceedings for want of jurisdiction.  Mr Shum submits that I should only strike out an action in a plain and obvious case and if a complicated or difficult question of law exists, I should decline striking out.  However, I think the law as discussed above is clear, and it is plain and obvious to me that Mind Body’s claims should have gone to the Labour Tribunal.

44.  Thus, I allow Lee’s application and order as follows:-

(1)     The action made by Mind Body against Lee be struck out; and

(2)     Costs order nisi: Mind Body do pay Lee the costs of the action including the costs of the striking out application with certificate for counsel to be taxed if not agreed, and Lee’s own costs be taxed in accordance with the Legal Aid Regulations.